What makes the bTokens valuable?
July 8, 2022
Chicken Bonds provide users with the opportunity to earn an amplified yield on their tokens. This extra yield is captured by the bTokens. To see how this is achieved, we first need to understand how the protocol autonomously manages its own treasury and what happens to the bonded tokens when bonds are claimed (Chicken In).
The protocol operates a treasury consisting of 3 different buckets, which all contain the underlying token and earn yield:
- Pending Bucket: holds the deposited tokens while they bond.
- Reserve Bucket (POL): receives a portion of the bonded tokens from the Pending Bucket upon Chicken Ins and captures the yield from all 3 buckets.
- Permanent Bucket (POL): receives the other portion of the bonded tokens from the Pending Bucket upon Chicken Ins.
Note that the buckets are mainly used for the protocol’s internal accounting and may be physically invested in the same or in different places earning different yields.
When a user bonds tokens, they are first placed in the Pending Bucket. In case of a Chicken In (user claiming their bond), the bonded tokens are split and moved into the two other buckets depending on how much of the cap has been used up. If somebody has bonded e.g. 10’000 tokens and reached 60% of the cap, 6’000 tokens would transition into the Reserved Bucket and 4’000 into the Permanent Bucket. This split ratio ensures that the Reserve Bucket grows by the same proportion as the bToken supply (due to the fresh bTokens minted by the bonder).
This non-dilutive property is important since the Reserve Bucket has a special role: it directly backs the bToken supply. bToken holders can redeem their tokens (which get burned) for a pro rata share of tokens in the Reserve Bucket any time.
As a consequence, the system’s backing ratio (Reserve Bucket / bToken supply) will act as a price floor below which arbitrageurs can profitably redeem bTokens, pushing their price back up.
Due to the split ratio applied by the protocol, Chicken Ins don’t affect the backing ratio (price floor) which can thus only grow but never shrink. Since the Reserve Bucket captures the yield from the entire treasury, the yield is essentially amplified, letting the price floor rise even faster than the value of a simple portfolio of the underlying token. In other words, the bToken comes with a downside protection that is rapidly increasing over time!
By pricing in this Yield Amplification and the downside protection, the bTokens should trade at a premium above their price floor. This will drive a flywheel: the more people bond, the more yield is retained for the bToken holders. A higher yield in turn increases the price premium, making bonding more attractive through a higher APR.
This flywheel effect enables protocols to bootstrap POL at no cost by acquiring liquidity over time and capturing some of it permanently.
Key Benefits of bTokens
Non-inflationary: the bonding mechanism ensures the bToken supply is fully backed by the underlying token and that the backing ratio can only increase, never decrease
Rising floor price: the constantly increasing backing ratio creates a rising price floor for the bToken, giving buyers a minimum guarantee on their investment, and an estimation of future growth
Redeemable: “bToken can be redeemed for the deposited tokens (Reserve Bucket) by anyone at any time, although bToken holders should be able to get a better rate selling their bTokens on the market, under rational market conditions
Note that the bToken has a guaranteed floor price but will still be volatile above this price, thus traders will be subject to additional price risk compared to the underlying.
For more information, refer to section 4 of the whitepaper.